Warehouse Clubs A Hard Sell In Chicago Market

The Tinley Park warehouse store wasn`t due to open for a few days. The landscaping wasn`t finished, the beer and wine hadn`t been delivered and cash registers were being installed.

But its director decided to hang the ``Now Open`` banner outside early and was letting customers in to look around, obtain their $25 memberships and begin shopping despite the myriad little things that needed to be done. It was an effort by the store director to warm up customers to the warehouse/

wholesale club concept that has had a hard go of it in this area.

Nearly 10 years after the first membership warehouse club opened in the Chicago area, retailers are trying to identify why they can`t transfer the highly successful warehouse club concept from the West Coast to the Chicago market.

``It`s been a mystery to many people for a long time,`` said Steve Zabel, controller and investor-relations officer for Skokie-based Warehouse Club Inc., which opened its first store in the Chicago area in 1983.

Warehouse or wholesale clubs are members-only discount chains that offer a broad range of merchandise, from groceries to electronics products, on a cash-and-carry basis. There are more than 450 warehouse clubs nationally.

Players have come and gone as people searched for the combination that would unlock the Chicago market. Metro, American Wholesale Club and most recently BJ`s Wholesale Club, which had units in Niles, Rolling Meadows, Calumet City and Hillside, have opened with high expectations only to close a few years later. BJ`s began closing its stores this month.

The latest entry, Pace Membership Warehouse Inc., recently opened 107,000-square-foot units in Tinley Park and Lansing. A third store will open early next year in Addison. Pace, a unit of K mart Corp., plans to have eight stores encircling Chicago within two years.

Pace, based in Englewood, Colo., will be competing head-to-head with Sam`s Warehouse Clubs, a unit of retailing giant Wal-Mart Stores Inc. that moved in the Chicago area two years ago. Wal-Mart has six Sam`s open and plans two more. In several cases, Wal-Mart and Sam`s are adjacent to each other, creating the so-called power centers.

Despite problems in the Chicago market, the warehouse-club concept nationally is booming. Sales totaled $21.4 billion in 1990 and are expected to grow 18 percent to more than $25 billion this year.

Sam`s is the industry leader with more than $6.5 billion in sales and 148 stores, followed by San Diego-based Price Club, with $5.3 billion in sales and 66 stores; Kirkland, Wash.-based Costco Wholesale Corp., with $4.1 billion in sales and 69 stores; and Pace, with 87 stores by the end of the year and $2.3 billion in sales.

The looming battle between Pace and Sam`s sets the stage for a larger battle next year when Target, a discounter owned by Dayton Hudson Corp., jumps into the war among discounters K mart, Wal-Mart and Venture stores.

The clubs look like the warehouses they are, with towering stacks of inventory, wide aisles and no sales people to help on the floor. Grocery items typically must be bought in multiple-count packages.

Though Pace is the latest entry into the Chicago warehouse-club market, it feels it knows the formula to success.

``We`ve been looking at the market for two years,`` said Robert H. Volz, senior vice president of operations for Pace. ``We are a late entry because we wanted to do it right.``

The concept for a warehouse- or wholesale-club operation is simple, said Volz. The inventory comes in the back door and goes out the front door so rapidly that it is virtually all sold before the bills from vendors are due.

(Most clubs operate on a cash-and-carry basis, but Sam`s and Pace accept the Discover card.)

``The concept is based on cash-flow,`` he said. ``You work on an 8 1/2 percent to 9 1/2 percent (profit) margin. You can`t own the inventory. The vendors have to own it.``

It sounds simple, but as the warehouse operations that have come and gone in the Chicago market have discovered, execution is the problem.

``We know the Midwest and believe in the Midwest,`` said Volz, who came to Pace in 1984 by way of Peoria and P.A. Bergner & Co. ``Midwestern shoppers have a show-me attitude.``

Pace will show the south surburbanites it knows how to run a warehouse/

wholesale-club, Volz said.

When the stores opened a few weeks ago, Volz said he hoped they would have signed up 25 percent of the area businesses and 25 percent of the households. He said they would hope to build that to 75 to 80 percent of the households and businesses in the area.

``Businesses are the core members,`` he said. ``We are the only club that has business-only hours (9 to 11 a.m.). We believe in giving that extra service.``

Price is the drawing card. The owner of a small restaurant can buy a dozen blueberry muffins for $3.74 and resell them for 99 cents each. The key to successfully shop a warehouse/wholesale club, Volz said, is buying a product when you see it because it probably won`t be there a week from now.

Merchandise in the clubs constantly changes as one manufacturer or another offers special deals for large purchases. This week a club store might have Peter Pan peanut butter, next week it will be Skippy.

But Warehouse Club`s Zabel said they aren`t concerned about competition from two of the biggies.

``By far they have much more staying power than little Warehouse Club,``

he said, adding that the company isn`t against talking a merger or acquisition. The stock was trading at 37 cents a share last week. It has outlets in Niles, Bridgeview and Hammond locally; three units in Detroit; and one each in Pittsburgh, Dayton, Columbus and Akron.

``Warehouse Club has 10 units and we`re more capable of reacting to the marketplace than they are,`` said Zabel. ``Sam`s will have 200 units soon. Does he know eactly what`s going on in Chicago? Do his buyers in Bentonville, Ark., know what people here want?``